Nick Bruining: Chalmers’ extended deeming rate freeze a huge win for income-tested Centrelink pensioners

With interest rates expected to stay higher for longer, those Centrelink customers with money to invest have dodged a very nasty bullet and will benefit significantly from the 12-month extension to the deeming rate freeze announced in last week’s Federal Budget.

The extension means that anyone with some cash to invest can easily beat the system in safety.

Many economists believe that this year’s Budget handouts — combined with the looming stage 3 tax cuts — will maintain inflationary pressure, resulting in interest rates staying where they are until next year.

Some even think we may see a further rise in the Reserve Bank’s official cash rate between now and Christmas.

Centrelink’s deeming rates were frozen as part of emergency economic measures imposed during the COVID-19 pandemic and were due to end on June 30 this year.

As the RBA cut rates to a record low 0.1 per cent, deeming rates were also trimmed and frozen at 0.25 per cent for the first $60,400 for singles and 2.25 per cent for all amounts above this threshold. For couples, the combined lower threshold amount is $100,200 and above this the deemed amount is 2.25 per cent.

It means a single retiree with, say, $300,000 to invest currently has Centrelink deemed income of at least $5542 a year.

That $300,000 could be invested in bank accounts now paying at least 4 per cent a year — or more than $12,000 in interest payments over the year. In other words, “beating the system” by more than $6000.

For age pensioners, Centrelink takes the value of all your financial assets including cash, bank accounts, shares, managed investments, bullion, account-based pensions, superannuation and gifts over certain limits and multiplies the value by the deeming rates. This annual total is divided by 26 to give a fortnightly amount.

This amount — plus foreign pensions, net rental receipts and gross employment income — is “tested” against Centrelink’s income test thresholds. Once income exceeds $204 a fortnight for singles, or a combined $360 for couples, the pension is reduced at the rate of 50¢ per dollar.

While the deeming rates will remain frozen, the lower thresholds for singles and couples will still change on July 1.

With the RBA’s official cash rate now at 4.35 per cent, many had expected deeming rates to return to more “normal” levels of 4 per cent and 6 per cent, respectively. These were the deeming rates in 2008 when the cash rate was at 4.25 per cent.

Had the rates returned to these levels, a single pensioner with $300,000 in financial assets would have deemed income of more than $16,792 a year and have had more than $220 a fortnight clipped off their pension.

A pensioner couple would have seen a reduction of about $128 a fortnight on the back of deemed income of just under $16,000 a year.

The freeze also benefits Commonwealth Seniors Health Card customers with significant amounts in ABPs.

Assessable income for the card includes taxable income added to the deemed income attributable to money held in ABPs.

A single retiree with a $1.5 million investment in an ABP currently has deemed income of $31,746 a year attributable to the ABP fund. Were the deeming rates to increase to “normal”, that would jump to $88,792.

While that is still under the cut-off limit of $95,400, it dramatically reduces the other income that could be earned from part-time employment, foreign pensions and rental receipts.

For couples, the combined cut-off income test threshold is $152,640.

These limits will lift on September 20, in line with inflation.

It is expected that the deeming rates freeze will come off in July 2025, after the next election, so your next investment might be a bulletproof vest.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association